December 11, 2015 / 8:04 PM / 2 years ago

Valeant investors pressure Pearson for a new plan

5 Min Read

The headquarters of Valeant Pharmaceuticals International Inc., seen in Laval, Quebec November 9 2015. Valeant CEO Michael Pearson has come under increasing pressure as the company's stock plunged from $263.70 on Aug. 5 to below $80 last week on scrutiny over high price markups for its drugs and accusations it used a specialty pharmacy, Philidor Rx Services, to inflate revenue.Christinne Muschi

NEW YORK/BOSTON (Reuters) - Valeant Pharmaceuticals International Inc (VRX.TO) investors are turning up the pressure on the drugmaker to produce a detailed plan on how it will deliver profit growth in 2016.

Chief Executive Officer Michael Pearson will hold a meeting next week for hundreds of investors for the first time since the Canadian company has come under fire over steep price hikes for its drugs and billing practices at closely linked pharmacy Philidor Rx Services.

Valeant has cut ties with Philidor, which used aggressive tactics to get insurers to reimburse the costs of the company's dermatology medicines. The pharmacy is closing down, and Valeant's board has opened an investigation.

The negative news about Philidor pushed Valeant shares down 75 percent in the last four months, but investors say they see signs that the company is containing the damage from outside investigations by U.S. lawmakers, prosecutors and investors.

In interviews with Reuters, three major Valeant investors and four of its smaller shareholders said the task for the company is to commit to growth and demonstrate how it will get there.

    One investor, who requested anonymity, said he had sold his Valeant shares in the summer and was waiting for the meeting to decide whether to buy in again.

Investors said Wall Street wanted three things from Wednesday's meeting: a 2016 forecast for earnings around $14 per share versus the $11 projected for 2015, no more bad news or surprises, and a new plan for selling dermatology products through specialty pharmacies.

Another investor who asked for anonymity said Valeant must lay out a strong rationale on how it will achieve the 2016 earnings. He said he would prefer a forecast of $12 per share with a clear description of how it will sustain that than $14 based on overly optimistic projections.

   Pearson has warned investors that raising drug prices would be tougher next year. Valeant must also replace its relationship with Philidor, which accounted for 7 percent of sales.

   A Valeant spokeswoman declined to comment on investors' expectations ahead of the meeting.

The company has promised to provide a financial outlook at the meeting. In November it said it would have a plan to distribute dermatology drugs within 90 days.

   No Bad News Is Good News

   The focus on 2016 earnings is a change from two months ago, when many investors dumped Valeant on concerns that new, undisclosed problems would arise and that sales of other medicines, from eye-care treatments to neurology products, would suffer due to the scandal.

    But since hitting a low of $69.34 on Nov, 18, the company's shares have rebounded by 38 percent, which several investors attributed to a "no bad news is good news" sentiment.

    Recent purchases by Valeant's biggest shareholders, including activist investor Bill Ackman's hedge fund, have helped. Investor John Paulson also bought more shares this quarter, a source familiar with the matter said.

    Once investors have confidence about 2016 earnings, they can back a stock price above the current level of about seven times estimated 2016 profit.

Some see a multiple of nine to 11, while one large investor raised the possibility of 15, which would bring the shares to $200, within 18 months to two years. Valeant stock has dropped from a high of $263.70 in August to about $95 on Friday.

A survey of 200 investors from Evercore ISI found that most expect 2016 earnings between $12 and $14 per share.

“The most important thing (to investors) that I am hearing is EPS guidance for next year," Evercore ISI analyst Umer Raffat said.

Investors also want to know when they will hear from the committee Valeant’s board set up to investigate the business with Philidor, Raffat said.

    There are still risks around new information that poses a threat to the stock, he said, such as if “we learned that Mike Pearson is personally involved (in the controversial practices at Philidor) or if a whole new Philidor issue comes up.”

Reporting by Caroline Humer and Carl O'Donnell in New York and Svea Herbst in Boston; Editing by Michele Gershberg and Lisa Von Ahn

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